![]() Some of these are related to (but not caused by) the economic downturn. Why do we have a structural deficit?Ī number of non-cyclical factors have contributed to the high deficits of recent years. Meanwhile, debt held by the public rose from 62.8 percent of GDP to 67.7 percent. This still left a structural deficit of $928 billion, for a total deficit of $1.3 trillion. The structural deficit reflects a chronic mismatch between government revenue and spending that under current policies will dramatically worsen as health care costs rise and the population ages.Īccording to the CBO, cyclical factors added $367 billion to the deficit in 2011. The cyclical deficit is caused by the financial crisis and severe recession from which the country is still recovering. The United States currently faces both a cyclical and a structural deficit. With structural deficits, one-time spending cuts or temporary tax increases may help to relieve the pressure but cannot solve the problem. ![]() The most effective policy changes are those affecting permanent law, such as entitlement programs and tax provisions that run on autopilot. If government spending exceeds tax revenue even when the economy is strong, then the deficit is deemed to be “structural.” Unlike cyclical deficits, structural deficits reflect a chronic problem that must be addressed through changes in tax and spending policies. Once the economy recovers, tax revenue and government spending on assistance programs should return to normal levels. The result is a temporary, or cyclical, increase in the deficit. In budget parlance, these are known as “automatic stabilizers” because they help to maintain demand in an economy that is not producing enough of it to keep growing. At the same time, government spending rises because more people need assistance through programs such as Medicaid, unemployment benefits and food stamps. A recession drives down government revenue because many workers and businesses are no longer earning as much taxable income. The cyclical component can be attributed to the weak economy. To understand the current situation and to choose appropriate solutions, it is important to distinguish between “cyclical” and “structural” components of the deficit. Indeed, implementing a credible long-term strategy to bring deficits down to a more sustainable level would likely enhance near-term assistance to the economy.Īs Douglas Elmendorf, director of the nonpartisan Congressional Budget Office (CBO) has stated, such steps “would tend to boost output and employment in the next few years by holding down interest rates and by reducing uncertainty and enhancing business and consumer confidence.” 1 That does not mean, however, that we should put aside all policy changes designed to reduce deficits over time. Moreover, economic theory suggests that immediate spending cuts or tax increases could hamper the recovery by limiting demand. We do indeed need to be concerned about growing the economy and it’s certainly true that a growing economy will help reduce the deficit. It’s a theory that’s only half right, and ignoring the half that is wrong could get us into much deeper trouble. ![]() This line of reasoning has led some to conclude that deficit reduction should be deferred while we do things to stimulate the economy, such as tax cuts and new spending, which would actually increase the deficit in the near-term. When the economy recovers, we’ll be fine. One possible response to the recent spike in federal budget deficits - from $161 billion in 2007 to more than $1 trillion in each of the last three years is: Don’t worry.
0 Comments
Leave a Reply. |
AuthorWrite something about yourself. No need to be fancy, just an overview. ArchivesCategories |